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The Welfare Gains of Improving Risk Sharing in Social Security

  • Olovsson, Conny

    ()

    (Institute for International Economic Studies, Stockholm University)

This paper shows that improved intergenerational risk sharing in social security may imply very large welfare gains, amounting to up to 15 percent of the per-period consumption relative to the current U.S. consumption. Improved risk sharing raises welfare through a direct effect, i.e., by correcting an initially inefficient allocation of risk, and through a general equilibrium (GE) effect. The GE effect is due to the fact that the allocation of risk in the pay-as-you-go system influences the demand for capital. As a result, with an efficient risk sharing arrangement, the crowding out effect associated with an unfunded system can actually be completely eliminated. Efficient risk sharing in social security implies highly volatile and pro-cyclical benefits, i.e., that retirees' exposure to productivity risk is increased. Consequently, a policy involving completely safe benefits will unambiguously be welfare reducing.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 728.

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Length: 29 pages
Date of creation: 10 Mar 2004
Date of revision:
Handle: RePEc:hhs:iiessp:0728
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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  1. Baxter, Marianne & Jermann, Urban J, 1997. "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, American Economic Association, vol. 87(1), pages 170-80, March.
  2. John McHale, 1999. "The Risk of Social Security Benefit Rule Changes: Some International Evidence," NBER Working Papers 7031, National Bureau of Economic Research, Inc.
  3. Martín Gonzalez-Eiras & Dirk Niepelt, 2005. "Sustaining Social Security," CESifo Working Paper Series 1494, CESifo Group Munich.
  4. George M. Constantinides & John B. Donaldson & Rajnish Mehra, 2002. "Junior Can'T Borrow: A New Perspective On The Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 269-296, February.
  5. Dirk Krueger & Felix Kubler, 2006. "Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?," American Economic Review, American Economic Association, vol. 96(3), pages 737-755, June.
  6. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 1999. "The risk-sharing implications of alternative social security arrangements," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 213-259, June.
  7. Andrew B. Abel, 2002. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," NBER Working Papers 9210, National Bureau of Economic Research, Inc.
  8. John Y. Campbell & Joao F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 1999. "Investing Retirement Wealth: A Life-Cycle Model," NBER Working Papers 7029, National Bureau of Economic Research, Inc.
  9. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
  10. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  11. Kent A. Smetters, 2004. "Trading with the Unborn: A New Perspective on Capital Income Taxation," Working Papers wp066, University of Michigan, Michigan Retirement Research Center.
  12. Conny Olovsson, 2004. "Why do Europeans Work so Little?," 2004 Meeting Papers 760, Society for Economic Dynamics.
  13. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  14. Robert J. Shiller, 1998. "Social Security and Institutions for Intergenerational, Intragenerational, and International Risk Sharing," JCPR Working Papers 43, Northwestern University/University of Chicago Joint Center for Poverty Research.
  15. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  16. Laurence Ball & N. Gregory Mankiw, 2001. "Intergenerational Risk Sharing in the Spirit of Arrow, Debreu, and Rawls, with Applications to Social Security Design," NBER Working Papers 8270, National Bureau of Economic Research, Inc.
  17. Bohn, Henning, 2009. "Intergenerational risk sharing and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 805-816, September.
  18. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  19. repec:fth:calaec:4-98 is not listed on IDEAS
  20. Henning Bohn, 1999. "Online Appendix to Should the Social Security Trust Fund hold Equities? An Intergenerational Welfare Analysis," Technical Appendices bohn99, Review of Economic Dynamics.
  21. Feldstein, Martin, 1996. "Social Security and Saving: New Time Series Evidence," National Tax Journal, National Tax Association, vol. 49(2), pages 151-64, June.
  22. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  23. Bohn, Henning, 1998. "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series qt9r2809f0, Department of Economics, UC Santa Barbara.
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